Hong Kong stocks can't escape US-China trade war's 'very long shadow'

Hong Kong's stock market is set to welcome a pair of big new listings this week, but the overall investor mood is likely to remain cool until the United States and China stop fighting over trade.

The benchmark Hang Seng Index on Wednesday will see the start of trading for mainland Chinese telecommunications infrastructure giant China Tower and Nasdaq-listed biotech company BeiGene.

The former is the world's biggest initial public offering in two years at $6.9 billion, according to Reuters, while cancer drug developer BeiGene is the first Nasdaq-listed biotech company to offer a secondary share flotation in Hong Kong.

The listings follow Chinese smart phone manufacturer Xiaomi's high-profile debut last month in what had been touted as a big year for initial public offerings in the semi-autonomous Chinese territory. But the highly anticipated new blood has failed to boost the Hang Seng, which is down about 8 percent so far this year.

Neighboring Chinese stock markets have also taken a big hit this year, weighed down by a slowing growth outlook, a weakening currency, U.S. President Donald Trump's trade offensive against Beijing, and China's retaliatory measures.

Stefan Hofer, chief investment strategist at LGT Bank in Hong Kong, said the local market has underperformed despite the city's solid economic and fiscal policy fundamentals.

The problem, he stressed, is elsewhere and out of Hong Kong's control.

"We do have this dark cloud from trade and that is casting a very long shadow over everybody," Hofer told CNBC. "And it's not that the Hong Kong market can completely escape that."

Hong Kong is considered a separate entity from China in terms of local governance and trade, so the territory is not subject to any new U.S. tariffs. But thousands of Hong Kong-owned companies have manufacturing operations in China and financial links with the mainland are growing.

'Turn on a dime'

The trade tensions have shown little sign of easing and, on Wednesday, the Trump administration said the president told his top trade official to consider raising proposed tariffs on $200 billion in Chinese goods to 25 percent from the 10 percent rate currently under consideration. China followed up on Friday saying it was ready to retaliate with tariffs on about $60 billion worth of U.S. products.

For investors in Hong Kong looking for a conservative play during the current uncertain environment, Hofer recommended "very defensive local names that should be able to ride out these storms a little bit better," including Hang Seng Bank.

China Tower, though a mainland company, may also soak up some investor interest with its domestic focus and its positioning that's seen as less vulnerable to international trade tensions.

"Basically, it's like a monopoly in the China market," said Ivan Li, research director at DBS Vickers in Hong Kong, stressing China Tower's dominant market share.

"Investors are getting more picky and, in general, they are seeing a shift towards more traditional industry," he said.

Hofer, meanwhile, noted the rapid deescalation in trade tensions between the U.S. and the European Union last month after they agreed to work toward a solution on tariffs and said something similar could happen between Washington and Beijing.

"And, if that happens, then market sentiment will turn on a dime and you're going to see very sharp rallies in Asia, in China, in Hong Kong, certainly also in Europe," he said.

Erwin Sanft, managing director and senior portfolio manager for international investment at E Fund Management in Hong Kong, agreed that a trade resolution would be beneficial for Hong Kong equities, mostly because it would bolster the wobbling Chinese yuan.

"To the extent that would help the Chinese currency, then that would be a big boost for Hong Kong because the Hong Kong market very much trades with the renminbi," he said, referring to the official name for the Chinese currency.